What Happens when Amazon Low-balls Prices: A Short Lesson in Economics

Did you know that you can order number of different types of services through Amazon? It’s officially called “Amazon Home Services” (aka “AHS”) and house cleaning is one of them! Here’s how it works:

Someone searches Amazon (or Amazon displays in their sidebar) for a service. They’ll see that Amazon can provide regular house cleaning, deep cleaning or spring cleaning, carpet cleaning, Move-in or move-out cleaning, and a few others.

The customer selects, say, house cleaning and enters information (# bedrooms, #baths, square footage of home) and then sees an estimated price. Click here to see an example.

Amazon then adds the customer request (includes three dates and times the customer has selected as good for them) to the service provider app.

On the day and time agreed upon, you service the client. They sign the app that you’ve cleaned that day and you take a selfie photo in front of their home (to verify that you actually did clean THEIR home).

Amazon uses Independent Contractors to fulfill these cleanings, and it’s not difficult to get set up as an AHS provider. You submit information about your business like EIN or SS number (if you don’t have an EIN yet), insurance and workers comp info, and complete a background authorization for the company and also for any worker that will be in the client’s home.

Here’s what I like about working with AHS:

It’s not just another lead selling company (like Home Advisor or Thumbtack where you pay a fee for the lead regardless of if it ever leads to anything). Fees are only taken out of jobs you are awarded and service. AHS keeps 20% of all fees charged to the client so from this example of $170.52 the servicer gets $136.42, and Amazon keeps $34.10.

While the 20% is larger than lead fees from the others, there are no wasted fees paid. For example, if I purchase 3 leads from Home Advisor at $25 each and only land one of them, the effective fee for the one I got was $75. I can picked choose exactly which ones I want to request.

Above all, though, the best reason to use AHS is that they allow you to directly service the client in the future through your own business. So after the first visit, they all go through my company and I keep all the revenue:-)

But true to Amazon’s core value of trying to provide all things at the lowest possible price (something they typically are remarkably good at), it’s not a good business model for home services. When hiring a professional who will be in your home (cleaner, plumber, whatever) they will have access to YOUR HOME. And providing the cheapest possible servicer is a risky bet Amazon makes with the customer’s belongings.

I’ve seen some prices on AHS for cleanings that after their feee would only be $20/hour. As a cleaning company, I don’t even make any profit until I’m getting at least $30/hour, and neither will any other professional cleaning services company. If I was an independent solo cleaner (not company, just me), I’d still be able to get $25-$30/hour all day long from clients.

A little bit about basic economic principles. When determining prices, you must consider supply and demand, what your profit margin is, and what the market can bare:

All professional cleaners (solo or company) have overhead that must be met. Licenses, workers comp, travel time/gas, cleaning supplies, etc. If a job doesn’t profit you and there’s no guarantee it’s anything but a 1-time cleaning, you’d be better off sitting at home than doing a cleaning for a loss.

When looking at what the “market can bare” the price must be acceptable to both parties; provider and consumer. If price is too high, consumers won’t buy. If price is too low, provider won’t provide. The price needs to satisfy both parties.

In trying to low-ball prices, though, Amazon has cut their own throat unfortunately. I cannot tell you how many cleaning opportunities I’ve seen in the app that are underpriced by 25-50% (so I obviously dismiss them). Then, if no-one else requests to do it, AHS send out an email to the providers with the job details and price. So by being excessively low, they end up having to cancel the cleaning because “no cleaning professionals are available”. The customer is disappointed and Amazon has lost the opportunity for fee revenue.

Lesson: price based on what the market – BOTH sides of the market – can bare or risk loosing income. You’d think Amazon is large enough to learn that, but they’re new to the whole services industry and will (hopefully) learn how to run that business better. Or leave the market.